What Is Bitcoin Mining and How Does it Work?

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DeFi 
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The term “Bitcoin mining” refers to a complex technological process that consists in expanding the network of this cryptocurrency, maintaining its stability and creating new coins. Bitcoin mining involves dedicated rig and software, which solve numerical puzzles and verify transactions. Anyone can join this process, even if they lack technical expertise. Individuals who aren’t too tech-savvy can rent the equipment and let professionals take care of it.

Why Bitcoin Needs Miners

 

Bitcoin miners are in charge of the following tasks:

  • Verify Bitcoin transactions
  • Enable the network expansion
  • Prevent hacking attacks and other types of fraud

Thanks to them, the chain remains stable, safe and functional.

In the middle of the 22nd century, the last BTC is expected to enter circulation. Nevertheless, the network will still require Bitcoin miners. Instead of creating new Bitcoins, they will be verifying transactions and receiving fees for conducting them as rewards.

Bitcoin Mining Profitability

The more mining power you control and the cheaper the electricity in your area, the more you’ll earn in crypto. The higher the BTC price, the more valuable your rewards are.

In 2021, the price of this digital currency peaked at $65,000. In 2023, it plummeted by over 4 times. The Bitcoin mining profitability dropped significantly in around two years. However, it can recover at any time and even break the previous record. The more this asset costs, the higher the income of the people who mine it.

Comparison of Mining Hardware Profitability

For those who are satisfied with not too high income and can’t afford large investments, a graphic processing unit (GPU) will do. Its computing power is not impressive — but it can be used for gaming and other purposes.

An application-specific integrated circuit (ASIC) can boast a much bigger mining capacity. It costs more and can’t be used for anything else. It can bring you a much more generous profit — but be ready for a considerable initial investment.

Buying and Setting Up the Hardware

ASICs are available in multiple variations. If you prefer working solo, you’ll have to:

  • Pick the optimal model
  • Find a place to store it (it requires colling and affordable electricity)
  • Carry out the Bitcoin mining setup (it’s not enough to simply push the Start button — you might need to fine-tune the settings over time)
  • Regularly make sure that everything is working fine

This method suits only people who’re confident with the technology. 

Otherwise, anyone can join a remote pool. You’ll be renting a share of the pool at an affordable cost. A tech-savvy team will be in charge of all the technical aspects and share income with you. You’ll be allowed to monitor the efficiency of the process through a mobile app and/or dashboard on the website.

How to Choose Hardware for Bitcoin Mining?

The three crucial factors are:

  • Computing power 
  • Energy consumption
  • Required investment

GPU has the lowest entry threshold. Its price is low and you can use it on a computer. An ASIC costs much more but can deliver a much higher profit. If you decide to quit mining Bitcoin, you won’t be able to use your ASIC for any other purpose — the only way out will be to sell it.

The Economics of Mining Bitcoin

The economics of this asset is rather complicated. The Bitcoin reward that a miner can get depends on:

  • Price of this coin
  • Hardware efficiency
  • Energy expenses

The cost of energy depends on the geographical location. The mining hardware efficiency is determined by the initial power of the rig, its settings and the number of units used: the more units a person gets and the more powerful they are, the more lucrative the rewards. The BTC price fluctuates in correlation with the overall financial and economic situation on a global level.

What Is Crypto Mining?

It’s the process of solving numerical puzzles. In theory, a good mathematician can do it using a pen and a piece of paper. Yet dedicated Bitcoin mining hardware can cope with this task much faster and more efficiently. As soon as a puzzle is solved, a new block is added to the chain and the owner of the rig that is responsible for this achievement gets a reward. Plus, a new coin enters circulation.

What Is Bitcoin?

It’s a technologically advanced alternative to conventional money. The national currencies that we’re all used to (USD, EUR, CAD and so on) are called fiat ones. 

Not only Bitcoin miners but anyone can use this asset to pay for goods and services, invest and transfer funds to third-party recipients. You can buy BTC on a crypto exchange using fiat funds from your regular debit or credit card. You’ll need to get a software or hardware wallet to store your crypto savings.

The Bitcoin transaction fees are affordable — for instance, you don’t need to pay extra when sending money abroad. The speed of data transfers depends on the sent sum and on how busy the network currently is — but it’s always higher than the speed of processing fiat transactions.

Anyone can mine Bitcoin, provided that they buy or rent the necessary rig. Yet it doesn’t mean that people can release any amount of this digital asset. Its maximum supply is capped at 21 million BTC, which guarantees its stable value in the long run.

What Is Blockchain?

It’s a digital system that stores large amounts of data. A conventional physical server is located in one specific place. If something happens there, such as a flood or fire, this server will get destroyed and it will be impossible to retrieve the information that it contained. The only way out is to create backups and keep them in other remote locations.

The information that is recorded in the blockchain is stored in a distributed manner. The Bitcoin network consists of multiple devices that can be situated on different continents. If several devices go out of order, the data will remain available nevertheless. Such devices are called “nodes” and their owners were dubbed “validators”. Validators earn transaction fees for doing their job.

Once some information gets added to the Bitcoin blockchain, it becomes impossible to erase or edit in a clandestine manner. Such an approach ensures unprecedented security and transparency.

3 Concepts of Blockchain

The three pillars of the Bitcoin blockchain are:

  • Decentralization
  • Immutability
  • Transparency

Unlike fiat currencies, BTC lacks a central bank. Bitcoin transactions are verified by validators, which makes them exceptionally safe and transparent as well as drives down the risks of double-spending.

Bitcoin Profit and Bitcoin Mining Profitability

Let’s imagine that you have one Bitcoin mined. The higher its current price, the more you’ll earn in fiat funds. 

Don’t forget to deduct from the fiat price of your mined Bitcoin the energy expenses. Your rig needs to operate 24/7/365. The sum of your one-time investment in buying the equipment should be also deducted from your overall profit.

Bitcoin vs. Traditional Currencies

BTC favorably differentiates itself from fiat currencies thanks to its following merits:

  • Lack of control by a centralized authority
  • Higher speed of Bitcoin transactions
  • Lack of intermediaries
  • More affordable fees
  • Limited supply

On the flip side, it lacks stability. To be able to use it, it’s necessary to have a device that is connected to the Internet and on which its owner can install a crypto wallet. Bitcoin users can’t simply pull a digital coin out of their pocket, as they can do it with a paper banknote.

How Does Bitcoin Mining Work

The Bitcoin network is distributed and decentralized. It keeps continuously expanding because miners keep adding new blocks to it by verifying data transfers. To mine new coins according to the rules of the Bitcoin protocol, it’s necessary to solve difficult numerical puzzles with the help of powerful hardware.

Mining and Bitcoin Circulation

The BTC supply is limited to 21 million coins. The speed of adding new Bitcoins to the network keeps gradually going down and the mining difficulty keeps growing. In the middle of the 22nd century, it will become impossible to add a new Bitcoin to the network.

Prevention of Hacking

BTC is a decentralized asset. Its network isn’t controlled by any centralized authority such as a bank or a government. Multiple devices that are scattered all around the work maintain the chain. Such an approach efficiently prevents hacking attacks and boosts the stability of the system.

When a malicious actor tries to interfere with the chain, they might want to erase or modify the stored information. But the nodes won’t verify transactions if they seem suspicious. They will label them as dangerous and inform the other Bitcoin network participants. To bypass this protection mechanism, one should gain control over at least 51% of the chain. In practice, that would be hardly possible because it requires colossal expenses, which makes hacking unviable.

How to Mine Bitcoin?

Stick to this scheme:

  1. Purchase the rig
  2. Set it up and provide sufficient cooling to it
  3. Connect software to it
  4. Let your equipment start solving numerical puzzles

Don’t forget to regularly check your rig to make sure it keeps operating as intended. If not, provide maintenance to it or fine-tune its settings.

How to Mine Bitcoin at Home?

Today, it’s almost impossible to mine Bitcoin at home. In the early days of BTC, miners would work from their bedrooms or kitchens, using their regular laptops. Now, only large farms are capable of generating a sustainable profit. You’d need to have a lot of free space to accommodate the equipment. Plus, the cost of electricity in most areas with a dense population is too high to let you generate decent revenue.

How to Calculate Bitcoin Profit?

Use this formula: take the amount of the Bitcoin block reward and deduct the mining costs from it. A dedicated calculator can be used for this task.

To secure the highest profit, try cloud mining. Today, it’s the simplest and the most profitable mining variety. You rent a part of the provider’s processing power and don’t need to handle the technical aspects yourself. Thanks to an exceptionally shallow learning curve, anyone can join this business at any moment. It’s enough to invest a couple of hundred dollars initially. 

To better explain what we’re talking about, let’s use the example of the well-known ECOS calculator. ECOS is an Armenian-based company that offers cloud mining opportunities on lucrative conditions. To assess your upcoming profit, you need to indicate only three parameters:

  • Projected BTC price
  • Expenses that you can afford
  • Duration of your contract with the provider

The ECOS calculator will show your profit percentage, according to your contract’s hash power. You’ll get to know the cash amounts of your daily, monthly and total mining. The forecast will be based on a 3-month average mining difficulty.

Plus, you’ll find out how many BTC you would be able to buy with similar expenses. In the case of purchase, you’ll get zero profit. If you opt for mining, your profit might reach several hundred or even over a thousand percent.

The skilled and professional ECOS team will ensure the maximum performance of the mining hardware. You’ll be able to control the process remotely through a dedicated mobile app.

How Much Does a Miner Earn – Bitcoin Halving

Crypto miners’ income depends on three factors:

  • Market price of BTC
  • Energy expenses
  • Productivity of their rig

The first generation of Bitcoin miners could solve numerical puzzles right from their bedrooms, using their regular laptops. Today, it’s crucial to get an Application Specific Integrated Circuit (ASIC) because everyday computers can’t provide sufficient mining power. Moreover, working solo doesn’t make sense even with an ASIC. Instead, it would be wiser to join a mining pool.

To preserve the stability of the blockchain, the difficulty of mining Bitcoin regularly increases. This step was invented to compensate for the continuously growing number of Bitcoin miners. As the complexity of their work goes up, the Bitcoin block reward goes down. This rule was dubbed “halving”.

What Do I Need to Mine Bitcoins?

To become a Bitcoin miner, it’s necessary to invest in dedicated mining software and hardware. Connect the former to the latter and start working!

Please mind that you can’t place the Bitcoin mining hardware in a random location. Firstly, the rig that you’ll need to buy to secure a decent income will occupy a large place. Secondly, it will require powerful cooling. Thirdly, the lower the energy bills, the better. So, in addition to the rig, it’s necessary to have a good place for it.

Besides, it’s crucial to either have technical skills or rely on the assistance of a professional who can consult you. Alternatively, you can join a remote mining pool and let the service provider take care of your rig in exchange for a fee.

Is Bitcoin Mining Profitable?

In general, yes. Yet it’s important to keep in mind these details:

  • Working solo doesn’t make sense anymore. It used to be profitable only around a decade ago.
  • The higher the electricity costs in your area, the lower your income will be.
  • The entry threshold is rather high since you need to invest in a costly rig.

Since the crypto prices are extremely volatile, it’s hardly possible to precisely calculate your income in the mid or long run. Let’s imagine that you buy the rig when the BTC is expensive — but in half a year, its price plummets by 60%. Then, your business might generate losses for you because your energy bills will consume all your income. The situation might change at any moment when the price of the asset goes up once again. 

Bitcoin Mining Calculator, a Bitcoin Profitability Calculator

A Bitcoin mining calculator is a tool that enables you to assess your upcoming expenses and revenue. Make sure to use it before purchasing the equipment. This instrument will factor in the current BTC price, electricity expenses and the price of the rig.

What Does It Take to Run a Profitable Bitcoin Mining Venture?

To ensure profitability, be ready to:

  • Launch your business in a territory with affordable energy costs
  • Invest in powerful hardware
  • Get the necessary technical knowledge or hire someone who’ll share it with you

Don’t forget to factor in the managing costs and the expenses that scaling will require.

The answer to this question might vary depending on your whereabouts:

  • Legal
  • Illegal
  • Not regulated yet

If you live in a country that has legalized this type of activity, feel free to launch a mining business there if the political situation is stable. Can it happen so that in a couple of years, another political party comes to power and proclaims crypto mining illegal? If yes, then, consider launching your business in another state. Make sure your energy expenses will be affordable. 

If Bitcoin mining is not regulated in your area yet, avoid launching it there. Instead, consider joining a remote mining pool, if your local legislation allows you to do so.

Risks and Limitations

The key limitation is that you can’t make a sustainable profit when working solo. You need to either join a pool or invest huge funds in a Bitcoin mining farm that will belong exclusively to you.

The primary risks involved are:

  • Crypto price volatility
  • Legislative changes
  • High energy costs
  • Technical failures
  • Expenses related to maintaining and upgrading the rig

If you aren’t tech-savvy, it would be wise to delegate the technical aspects of your business to professionals in exchange for a fee.

Bitcoin Mining Electricity Cost Calculator

To mine Bitcoin profitably, it’s vital to assess the upcoming revenue and expenses in advance. This is when a dedicated calculator comes in handy. It will help you estimate your energy expenses, depending on the area where you’re planning to run your mining business. Electricity bills will be the largest part of your regular expenses.

A Pickaxe Strategy for Bitcoin Mining

Mining is not the only way of making a profit in the Bitcoin ecosystem. Alternatively, you can invest in a business that releases Bitcoin mining software or build ASICs with exceptionally high computing power. By doing so, you’ll protect yourself from the inevitable volatility of crypto mining.

Such an approach was dubbed “the pickaxe strategy”. The person who minted this expression drew a parallel with the Gold Rush. While many enthusiasts were digging for gold, others began to manufacture pickaxes and made a fortune thanks to a steadily high demand for these tools.

Pooling Resources for Bitcoin Mining

A Bitcoin mining pool is a group of people and/or companies who collaboratively use their resources to mine crypto. Anyone can join mining pools, regardless of their location. Pools accept remote participants in exchange for a fee. Since a pool consists of multiple rigs, it has much higher odds of solving numerical puzzles than solo miners. As soon as a reward is credited to the pool, it gets distributed among all its participants.

Bitcoin Mining Rewards Over Time

Over time, the rewards go down. It’s vital for maintaining the integrity of the network that keeps continuously expanding. As a result, miners have to put in more and more effort but their earnings keep decreasing.

Around every four years, the reward per one mined block drops down by 50%. This was dubbed “halving”. At the moment of writing this article, you can expect to earn 6.25 BTC per block, which is a lot. 

What You Need to Mine Bitcoins

You need hardware, software and technical skills. If you lack skills, feel free to resort to remote Bitcoin mining and let the provider take care of the technical aspects.

Mining Hardware

Bitcoin mining rigs are available in two varieties:

  • Application specific integrated circuit (ASIC). It’s a dedicated mining computer. It’s costly and powerful and can’t be used for any other purpose.
  • Graphics processing unit (GPU). It’s cheaper and more versatile — for instance, it comes in handy when playing video games on your computer.

Serious business requires ASIC to ensure a sustainable income.

An Analogy

The most common analogy between mining and conventional business is digging for gold. The Gold Rush took place in the middle of the 19th century in the USA. People became obsessed with the idea of getting rich overnight. They quit their jobs and began digging for gold. Very few of them succeeded and their stories were incredibly impressive. Many other people simply lost their time, nerves and funds. Some smart individuals found ways to launch more stable businesses in that environment — for instance, they began to produce and sell pickaxes to satisfy the increasing demand.

The modern analogy to the pickaxe business is the production of mining rigs and mining software. Alternatively, you can buy shares of companies that do so.

The Mining Process

The process of mining BTC is based on solving complex numerical puzzles. These puzzles are too difficult for a human mind but powerful hardware can efficiently cope with them. To solve a puzzle, it’s not mandatory to provide the correct answer to it. It’s enough to come up with an answer that is close to the right one. The first node that manages to do it receives the reward. The more nodes you control, the higher your odds of earning money.

What Is a ’64-Digit Hexadecimal Number’?

It’s the correct answer to the numerical puzzle that the system offers to miners. To be precise, it consists not only of numbers but of letters too.

What Do ’64-digit Hexadecimal Numbers’ Have to Do with Bitcoin Mining?

As soon as a node comes up with the right number of this format, a new coin gets mined. This number will correspond to a particular block that will be added to the chain.

How Do I Guess at the Target Hash?

It would be a bit incorrect to use the term “guess”. Instead of guessing, miners strive to calculate the right solution for each particular block. For this purpose, they use a dedicated rig.

What Are Mining Pools?

These are groups of individuals and/or organizations who collaboratively solve numerical puzzles. When one member of the network successfully adds a new block to the chain, all the other miners get their share of the reward too. The prize will be distributed among all the Bitcoin miners proportionally to their contribution to the pool.

Downsides of Mining

Even though the Bitcoin mining business seems to be lucrative, it has a few serious shortcomings:

  • Necessity to buy and fine-tune the sophisticated rig
  • Prohibitive energy costs in urban areas
  • Volatile prices
  • Technical failure risks
  • General instability of the crypto industry, especially of the legal aspects

Despite these drawbacks, the industry keeps developing. More and more people join it every year.

Bitcoin Energy Consumption

The Bitcoin network consumes huge amounts of energy. A whole small country could live on such amounts of electricity that the global mining community consumes. This causes concerns among eco-conscious people and incurs considerable expenses for miners.

How Much a Miner Earns?

The Bitcoin mining revenue depends on:

  • How many rigs you have
  • Their computing power
  • Current BTC price
  • Current energy prices
  • Expenses related to upgrading and maintaining the rig

To ensure greater stability, individuals and organizations form mining pools. Such an approach boosts their odds of coming up with the right solutions for numerical puzzles and earning rewards. If you work solo, your expenses will be high and stable — but it would be rare luck to get the reward.

Gone are the days when anyone could mine a large number of Bitcoins with minimum investment. When people were able to do so, the price of this asset was ridiculously low. Now that it’s high, mining has become much more difficult and resource-intensive. This business won’t make you a millionaire unless you invest millions in it. However, it’s rather possible to earn a few hundred or thousands of dollars per month with reasonable initial investments.

Why Mine Bitcoin?

Typically, people decide to try their hand at this type of activity to achieve one or several of the following goals:

  • Earn money
  • Make a smart investment
  • Familiarize themselves with a new promising technology
  • Support a decentralized project that challenges the traditional financial system

The first reason is the most popular one. However, now that you understand how Bitcoin mining works, you should realize that it can bring not only profit but also losses to you.

Why Do Bitcoins Need to Be Mined?

This technology ensures that:

  • New Bitcoins regularly join the circulation
  • The network remains stable
  • Data transfers keep being verified

The first goal is temporary because the BTC supply is capped at 21 million. The second and third goals will remain permanent.

How Does Mining Confirm Transactions?

It works on this principle:

  1. The system offers its participants a complex numerical puzzle to solve.
  2. All the nodes start to look for solutions.
  3. The node that is the first to come up with the right solution receives the reward. The chain expands by one more block.

The more mining power you have, the higher your odds of providing the solution sooner than others.

Why Does Mining Use So Much Electricity?

The nodes solve numerical puzzles and verify data transfers. The puzzles need to be complex and the verification process needs to be simple. To meet these two goals, large amounts of energy are required.

The Bitcoin mining work and blockchain mining in general are legal in some territories and illegal in others. The national governments that don’t prohibit this type of activity can either be neutral to it or support it. Supportive countries create special zones where electricity is cheap and grant tax benefits to mining businesses that are registered there.

Does Crypto Mining Damage Your GPU/Computer?

The mining process creates a significant workload on the rig. It can make a GPU go out of order prematurely. That’s why it’s recommended to invest in a Bitcoin mining machine and avoid putting your computer at risk.

To make sure the mining equipment serves you for many years and remains highly productive, it’s essential to configure it properly and provide powerful cooling to it.

Can You Mine Bitcoin on Your iPhone?

No. Mining Bitcoin requires much more computing power than any mobile device can offer. Even the latest and the most powerful iPhone is useless in this aspect.

However, if you join a mining pool, you might be able to supervise your Bitcoin mining operations from a mobile app on your smartphone.

Risks of Bitcoin Mining

Here are the primary challenges related to the Bitcoin mining process:

  • The Bitcoin prices are extremely volatile, which impacts the profitability of your efforts.
  • The mining equipment costs a lot. GPUs are cheaper and can be used for gaming and other alternative purposes. ASICs deliver better financial returns and cost much more — but they can’t be used for anything else. If you get frustrated about your business, you might be able only to sell your ASIC at a price that is lower than the market average.
  • Electricity costs in most territories are prohibitively high. You’ll need to either relocate to a lesser-developed area or control your business remotely.
  • The mining difficulty within the network keeps on regularly increasing, which drives down the income of each solo Bitcoin miner.

Thanks to joining a mining pool, you can overcome all the above-listed challenges except for the first one.

Bitcoin Price Volatility

The price of Bitcoin is highly volatile and can fluctuate greatly. Even though they correlate with the overall economic situation on a global level, Bitcoin prices are harder to predict than fiat currency prices.

Taxes on Bitcoin mining

The taxation of Bitcoin mining depends on the laws of the territory where you run this business. You might need to pay a tax on your block rewards, on the fact of selling digital assets and VAT. These were just a few examples. The global blockchain mining legal system remains extremely heterogeneous. Authorities have just begun to regulate this industry on the national and international levels.

Considerations and Risks of Bitcoin Mining

Bitcoin miners should be ready to cope with the following challenges:

  • The difficulty of cryptocurrency mining is steadily increasing and the rewards are decreasing. This doesn’t mean you should totally discard the idea of joining this business. But at least, you should realize that working solo doesn’t make sense anymore.
  • The more popular this technology becomes, the more miners join it and the more intense the competition between mining pools. 
  • In the case of mining rig failure, you might need to spend a large part of your profit on purchasing new equipment. Even if there is no emergency, your rig might go down simply because of being used 24/7/365.
  • This type of activity is detrimental to the environment because of its high energy consumption.
  • Even though it’s hardly possible to hack the Bitcoin network, thieves might steal your earnings from your wallet.
  • It makes sense to start this business only in a territory where it’s legally allowed. However, the regulations might change at any moment. This industry is too young to be stable.

In general, the answer to the question “Is Bitcoin mining profitable?” is positive. Nevertheless, risks need to be taken into account.



 


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BitcoinNewbie
BitcoinNewbie
7 months ago

Thanks for breaking it down in simple terms! As someone new to crypto, understanding mining was a bit daunting. Feeling more confident now!

User123
User123
7 months ago

Fascinating read! I never realized the crucial role mining plays in keeping the Bitcoin network secure and operational. It’s like a digital gold rush!

DecentralizedFuture
DecentralizedFuture
7 months ago

The decentralized nature of Bitcoin mining is what attracts me the most. It’s empowering to know that no single entity controls the system.

GreenEnergyAdvocate
GreenEnergyAdvocate
7 months ago

Great article! However, the environmental impact of mining concerns me. Are there any eco-friendly alternatives being explored?

SecurityMatters
SecurityMatters
6 months ago

Security is critical in this space, and I’m glad the article touched on potential threats like attacks. We need to stay vigilant!

CryptoEnthusiast21
CryptoEnthusiast21
6 months ago

I’ve been mining Bitcoin for a while now, and this article covers the fundamentals perfectly. Mining can be tough, but the rewards are worth it!

TechGeek95
TechGeek95
6 months ago

I’m amazed by the complexity of the mining process. It’s like solving puzzles to validate transactions and create new coins. Truly innovative technology!

BlockchainEnthusiast
BlockchainEnthusiast
6 months ago

I’ve always been curious about the economics behind mining. The discussion on mining profitability was enlightening. Kudos!

CuriousInvestor
CuriousInvestor
6 months ago

I can see why mining difficulty keeps increasing. The competition is intense! I wonder how it will evolve in the future.

FutureOfFinance
FutureOfFinance
6 months ago

This article opened my eyes to the broader implications of mining. Bitcoin’s impact on the financial industry is undoubtedly transformative!


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